Using the standard deviation of returns as a proxy for the total risk, by how much would the total risk change if you hold either stock X or Y separately versus holding a portfolio of XY that consistent of 60% in X and the remainder in Y? What is the correlation coefficient between X and Y? If there is or there is not any changes, make sure to explain the financial (not the mathematical) logic behind it. X Y 40.00% 40.00% -10.00% 35.00% 35.00% -10.00% Year 2007 2008 2009 Average return = Standard deviation = 21.67% 27.54% 21.67% 27.54%

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Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary. 

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.